Lets play a game of word association:
What comes to your mind? Success, Billions, Silicon Valley?
With startups, the one word that jumps into my mind is “optimism”. Hopeless, naive optimism even. The belief that despite towering odds, you have a chance at success and glory!
Indeed, in recent times, there has been good reason for this optimism. My generation saw Mark Zuckerberg quit college and start a company that would go on to be valued at over 200 Billion. And Zuckerberg is hardly a rare success, others like Elon Musk, Brian Chesky, Alex Ohanian, Biz Stone are changing our world in really substantial ways.
This optimism is infectious apparently, and all of Silicon Valley is feeling it. Startup valuations are at an all time high and have been rising steadily since the downturn of 20081. So it certainly seems like there has never been a better time to get into the startup game.
Got an idea? Got what it takes to run a company? I recommend a healthy dose of realism. No no, I am not trying to discourage you but lets just review the facts, shall we?
Startup success is rare
As a first time founder, your chances of success can be as low as 18%2. While this might be somewhat intuitive, there is evidence to show that even the best minds in the business are not great at picking out winners3. Unfortunately, in the startup world, early interest does not imply or guarantee success. CBInsights analyzed dead startups between 2010 and 2013 and found that they usually die 20 months after raising financing and after having raised about $1.3 million. Now, of all the startup stats that i have seen the most surprising one has not been about how many startups fail but rather why they fail. CBInsights’ post mortem of 101 startup failures showed that the top reason for failure was “no market need”4. It is plain shocking to me that any company can be launched without first validating market need!
But over the years, what I have realized is:
Market need is hard to establish on paper.
Consumers lack imagination and typically don’t know what they want until they see it. The best way to prove your idea is by taking it to market.
Building a great product is hard enough but to get traction, you need to find the right customers and deliver the right pitch. Even with the right fit, Startups grow only when they can cut through the noise and progressively solve wider sets of problems for a wider set of people. Startups need to be constantly hacking, testing new features and evangelizing their product to new customers. Most startups try to rise to this challenge by seeking funding to grow the company. And this is where they hit another roadblock.
Hiring is hard
The cost of a bad hire is pretty difficult to measure but its easy to see that in a startup with 10 – 50 employees, a bad hire can lead to missed opportunities, efficiency and bad morale. Startups, especially early stages, require employees with the same entrepreneurial mindset as the founders. And so often, young startups find that employees that look great on paper are technically solid but lacking the passion to work the 80 hr weeks.
The challenge is real! With limited budgets, what do you focus on? Proving your product? or building a big beautiful company?
Here is a guiding principle that I use:
Scale investment with traction
Have you heard he expression, “takes a village to raise a child”? In my experience, startups are no different. Successful startups are often supported by large communities of mentors, investors and other startups. People who have gone through the process themselves are very perceptive of the challenges of setting up a new business. And many offer professional services that are vastly more efficient than untested hires. Leveraging these communities is a significantly safer and efficient way to gain traction without growing the company beyond its means. If you plan well, you can often identify your customers, launch your MVP and prove your “market need” without the overhead of a 50 person company.